Rental Property Repairs or Improvements: Why the difference matters at tax time

If you’re doing work on your rental property, it’s not always obvious how those costs should be treated for tax purposes.

Repairing tenant damage, freshening up the property between tenancies or installing a heat pump may all seem like everyday property expenses, but they can have very different tax outcomes.

Understanding whether work is considered a repair, maintenance or an improvement can help you keep the right records, understand what may be claimable and avoid surprises at tax time.

Here are some common examples to help explain the difference.

What’s the difference between repairs, maintenance and improvements?

A simple way to think about it is:

Repairs restore something that’s broken or damaged and return it to its original condition.

Maintenance keeps your property in good working order and helps prevent it from deteriorating over time.

Improvements or capital upgrades make the property better than it was before, add something new or significantly extend the life of an existing asset.

Sometimes the difference is obvious, but many property projects include a mix of all three. That’s why it’s important not to assume every cost on an invoice will necessarily be treated the same way.

Example 1: Repairing tenant damage

The situation

Your tenant accidentally puts a hole in a Gib wall, breaks an internal door and damages a section of skirting board.

What it could mean

Repairing the wall, replacing the damaged door and fixing the skirting are generally considered repairs because you’re restoring the property to the condition it was in before the damage occurred.

However, if you decide to remodel the room at the same time or replace existing items with higher-quality finishes, those additional costs may be treated as improvements rather than repairs.

Example 2: Repairs and maintenance between tenancies

The situation

Your tenants move out and, before advertising for new tenants, you repaint tired walls, repair a leaking tap, replace a broken shower head and have the carpets professionally cleaned.

What it could mean

If the property is simply between tenants and your intention is to rent it out again, repairs and routine maintenance of this nature are generally deductible.

A short vacancy between tenancies doesn’t automatically prevent you from claiming these costs. The key is that the work is being carried out so the property can continue earning rental income.

Example 3: Healthy Homes upgrades

The situation

Your rental doesn’t have a heat pump, so you install one to meet the Healthy Homes Standards. While the contractor is there, they also repair an existing bathroom extractor fan.

What it could mean

These two jobs are generally treated differently.

Installing a heat pump for the first time is usually considered a capital improvement rather than a repair, so it isn’t generally an immediately deductible repair expense.

Repairing an existing extractor fan, however, is generally treated as a repair because you’re restoring an existing asset rather than adding something new.

This is a good example of why different costs within the same project may need to be treated separately.

Example 4: Getting your rental ready to sell

If you’re preparing to sell your rental property, the tax treatment of repairs and maintenance can become less straightforward.

For example, repairing tenant damage to get the property ready for its next tenant may be treated differently from carrying out similar work as part of preparing the property for sale.

The timing and purpose of the work, along with your intentions for the property, can all make a difference.

If you’re planning to sell, it’s worth talking to your local SBA before starting significant work. We can help you understand what may be claimable and make sure you’re keeping the right records from the outset.

Keep good records

Whatever work you’re undertaking on your rental property, good records can make life much easier.

Keep:

• invoices and receipts
• quotes for larger projects
• a brief description of the work completed
• before-and-after photos for significant renovations.

These records can help support your claims and make it easier for your accountant to understand exactly what work was carried out and why.

Need more guidance on rental property expenses?

These are just a few common examples, and every property and project is different. Larger renovation projects can include a mix of repairs, maintenance and improvements, with different tax treatment applying to different parts of the work.

For a broader overview of rental property expenses, read our Claimable Rental Expenses Guide, which explains what landlords can generally claim and highlights other areas to be aware of.

If you’re planning significant work on your rental property or you’re unsure how a project should be treated, talk to your local SBA before you get started.

A quick conversation upfront can help you make informed decisions, keep the right records and avoid surprises later.